Understand What Cheap Means When Investing In Stocks

I enjoy reading all the comments and opinions of the members of my options forum which is free for any investor to join.  Today a member posted a copy of an article that was labeled “Three Dividend Stocks That Look Cheap Right Now”. The three stocks mentioned were Aflac Stock, Ford Stock and BP stock.

What Does Cheap Mean

The notion that something is cheap comes down to price. For example is Aflac Stock cheap at $62.00? Is it cheap at $60? What about at $55.00? What about Ford Stock? Is Ford Stock cheap today at $16.00 or would it be cheap at $14.00? Then of course there is BP stock. Last fall it was trading at $42.50 and this year it is trading around $50.00. Wasn’t it cheaper at $42.50?

The notion that a stock is cheap can be based on everything from the Price to Earnings or Price to Cash Flow to projected revenue growth and even the dividend yield. What the author of the article liked was the dividends being paid by the underlying company. But of the three stocks he mentioned, only Aflac Stock has not ever cut its dividend. That said, Aflac Stock did not increase its dividend after the financial credit crisis until November 2010. So would Aflac Stock still be worthy of having in a portfolio? If the answer is yes, wasn’t Aflac Stock cheap in March 2009 when it hit $10.83. Wouldn’t that have been the fire-sale price to be buying the stock, and if it was, then why would investors think that with the stock up 472% since March 2009, it is still cheap today?

Strategy Discussion

This is a strategy discussion on the importance of understanding what cheap means in stock investing especially when investing through options, whether selling or buying. FullyInformed Members can access this strategy discussion  through this link or Members can sign in here. Non-members can join here or read about the benefits of being a member.

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